2.3 Competitive Market Equilibrium + Price Mechanisms Flashcards
When does market equilibrium occur?
at the price where quantity demanded equals quantity supplied of the product.
Quantity demanded = Quantity supplied
When does market disequilibrium occur?
when the level of output is allocatively inefficient, ie. has too much or too little is produced from society’s point of view.
What does point A on this supply demand curve show?
Market Equilibrium (Supply = Demand)
What does point B on this supply demand curve show?
Excess Supply (Supply is greater than demand)
What does point C on this supply demand curve show?
Excess demand (Demand is greater than supply)
What happens if firms are producing at point B?
Supply is greater than demand, so price is decreased from P2 to P resulting in an increase in quantity demanded from Q4 to Q1
What are the two price mechanisms?
- Resource allocation (signaling and incentive)
- Rationing
What is the “Signaling” function?
The price mechanism sends information (signals) where resources need to be allocated.
For example, if the price of dishwashers increases, this signals to consumers to decrease qty demanded or leave the market, and signals to producers to increase qty demanded or enter the market
(signaling function associated with shifts in demand and/or supply)
What is the “Incentive” function?
Motivating consumers and/or producers to behave a certain way.
For example, the higher price of dishwashers incentivizes produces the produce more as more profits can be made, but incentivizes consumers to buy less.
Therefore the incentive function is associated with movements along the demand and/or supply curves.
What is the “Rationing” function?
Prices sure to allocate resources and ration scarce resources.
For example, say the demand for covid vaccines is higher than supply. Then there is an excess demand –> prices increase –> less consumers willing and able to purchase at this price.
Rationing serves to limit scarce resources when demand exceeds supply.
Associated with a movement along the demand curve.
What is the “Signaling” function associated with?
Signaling function associated with shifts in demand and/or supply.
What is the “Incentive” function associated with?
Therefore the incentive function is associated with movements along the demand and/or supply curves.
What is the “Rationing” function associated with?
Associated with a movement along the demand curve.
What is consumer surplus?
Consumer surplus is the difference between what consumers are willing and able to pay and the price they actually pay.
What is producer surplus?
Producer surplus is the difference between the price they are willing to sell the good at and the price they actually receive.
How can consumer surplus be shown on the demand/ supply curve?
The consumer surplus is the area below the demand curve and above the equilibrium price.
How can producer surplus be shown on the demand/ supply curve?
The producer surplus is the area above the supply curve and below the equilibrium price.
What is community surplus?
Community surplus is the sum of consumer surplus and producer surplus at any given price and output. It represents the total benefit available to society from an economic transaction.
